7 Things To Know About The $1.8B IBM-HCL Technologies Deal

IBM Unloads A Raft Of Software On HCL Technologies

India-based global solution provider HCL Technologies on Thursday announced it is beefing up its software business and as-a-service capabilities with its $1.8 billion acquisition of a large part of IBM's software portfolio. The news comes a little more than a month after IBM said it would pay $34 billion for open-source software developer Red Hat.

Included in the HCL deal are such IBM products as IBM Appscan, a security-focused application for identifying and managing vulnerabilities in mission-critical applications; IBM BigFix endpoint management and security software; IBM Unica, a cloud-based enterprise marketing automation software; and IBM WebSphere Commerce, an omni-channel commerce platform for B2C and B2B organizations.

The software stockpile also includes the once highly regarded Lotus Notes, which IBM acquired as part of its $3.5 billion takeover of Massachusetts-based Lotus Software in 1995. Invented by Ray Ozzie, Lotus Notes was a hot channel property in its time.

Noida, India-based HCL said the software portfolio from IBM represents a total addressable market in excess of $50 billion. HCL Technologies’ products and platforms business revenue, prior to the acquisition, just crossed the $1 billion run rate.

The deal, which will be subject to regulatory reviews, is expected to close by mid-2019.

What do investors think of the deal?

The nearly $2 billion acquisition was announced Thursday night. On Friday morning, shares of HCL Technologies, which trades on the National Stock Exchange of India, were down 5 percent. IBM stock was also down, charting 2.92 percent lower, off $3.62 to $120.25 a share.

"It is important to note that most of these products have been sold on the back of the stable relationship with IBM, existing Strategic Outsourcing or a Managed Services contracts and the ability to convert capex (capital expenditure) to opex (operational expenditure) thanks to IBM's financing arm," Sanchit Vir Gogia, CEO at research firm Greyhound Research told the website moneycontrol.com.

What else is HCL getting?

IBM is also selling its IBM WebSphere Portal, a platform for developing enterprise web portals to help businesses deliver highly personalized social experience to clients; the IBM Notes and IBM Domino collaborative client/server software platform; and IBM Connections, a platform for integrating email, activity and task management, instant messaging, and file and document sharing.

Why does HCL Want IBM Software?

For HCL, the software being acquired is expected to give the company a lift in fast-growing security, marketing and commerce, all of which are strategic to the company, said C Vijayakumar, the company's president and CEO, in a statement.

The large-scale deployments of these products provide us with a great opportunity to reach and serve thousands of global enterprises across a wide range of industries and markets," Vijayakumar said in that statement.

What is HCL’s plan?

Darren Oberst, corporate vice president and head of the products and platforms business of HCL, told CRN that the acquisition was part of a long-term strategy by his company to diversify its business.

HCL is an $8 billion, 40-plus-year-old services company with core competencies in both engineering and software outsourcing and IT outsourcing, Oberst said.

"About three years ago, we started looking at our growth strategy and how to move away from the labor-intensive software business to provide more value to our clients," he said.

How does this get HCL past the goal line?

With the acquisition of this software portfolio from IBM, HCL will be able to combine the entrepreneurial capability, speed and performance of a company like HCL with over 100,000 employees worldwide with the software in such a way that will set it apart from its competitors, Oberst said.

"This represents a fundamentally new direction for us," he said. "We're moving into working with software with some of the largest companies in the world. We want to create a set of solutions that very few companies in the world can deliver."

Going forward, HCL Technologies and IBM will continue their long-term relationship where the two sell each other’s technologies, Oberst said.

"It's a win-win," he said. "We provide incredible opportunities for the software customers, and IBM focuses on the incredible opportunities for growth in the future."

Will the impact be felt by IBM’s business partners?

The deal, once it closes, is not expected to have a big change in how IBM's business partners work with the software as it becomes part of HCL Technologies, Oberst said.

"There will be no change in these arrangements until formal deal closure, which is expected to happen by mid-2019," he said. "Post-deal closure, HCL will work with IBM business partners to sign them up as HCL partners. Working with business partners has always been a core part of HCL’s business philosophy."

Apart from the cash, what’s in it for IBM?

For IBM, the divestiture of this part of its software business is a way for the company to better prioritize its investments in more emerging, high-value segments of the IT industry, said John Kelly, IBM senior vice president of cognitive solutions and research, in a statement.

"Over the last four years, we have been prioritizing our investments to develop integrated capabilities in areas such as AI for business, hybrid cloud, cybersecurity, analytics, supply chain and blockchain as well as industry-specific platforms and solutions including health care, industrial IoT and financial services. … We believe the time is right to divest these select collaboration, marketing and commerce software assets, which are increasingly delivered as stand-alone products," Kelly said.